How to Trade Using Market Sentiment and the Holiday Season

The months of November and December are the second strongest back to back
months for the financial markets. Many traders and investors use this time
of the year to reap big gains as they close the year out. The fact that most
traders and investors are sitting in cash and underweight stocks in their portfolio's
leaves me to believe a Santa Clause rally is just around the corner. Reason
being is everyone has cash on hand to buy stocks because they are selling their
positions in this pullback we are in right now. I know traders well enough,
they will buy back into the market trying to catch the holiday rally in the
coming weeks.

Subscribers and myself have been short the SP500 for a couple weeks after
watching the broad market become overbought and sentiment levels became overly
bullish with greedy pigs thinking they could buy stocks after a massive month
long rally that had not pullback. Once the selling started you would either
get you head handed to you or you were going to make a killing buying leveraged
inverse ETFs.

Those who arrived late to the rally are the ones selling out of their positions
this week. The interesting thing about this week's market condition is that
I have not seeing any real panic selling in stocks, and I'm not seeing the
volatility index spike in value yet.

What does this mean? Well it means we could actually see another big dip in
the market which should last 1-2 days and then we get a sharp reversal to the
upside.

Take a look at the SP500 & Volatility index below:

This chart allows us to get a feel for fear in the market. Me being a contrarian
trader, I focus on market sentiment extremes. When the masses are losing money
hand over fist I'm generally on the other side of that trade with open arms.
Trading off fear is one of the easiest ways to trade the market. That is because
fear is much more powerful than greed and it shows up better on the charts.
Spotting panic selloff bottoms is something that can be traded successfully
if you know what to look for and how to trade them.

On the chart you can see the pullbacks in the SP500 which triggered a panic
selling spike in my green indicator. What I look for is a pullback in the SP500
and for my panic selling indicator to spike over 20. When that happens I start
watching the volatility index for a spike also. The good news is that the volatility
index typically rises the following day making my panic indicator more of a
leading one...

Market Sentiment Trading

I could write a 20 page report going into depth this with topic, but that's
not the point of this report. Just realize that the stock market is likely
going to put in a bottom very soon and likely end with a STRONG panic selling
washout this week or next. If you want to learn more about how to trade market
sentiment and panic selling you can read my strategy which was published in Futures
Magazine.

Prepare for a sharp drop in the market which should kick start a holiday rally
in the next few trading sessions.

Chris Vermeulen, founder of AlgoTrades Systems., is an internationally recognized
market technical analyst and trader. Involved in the markets since 1997.

Chris' mission is to help his clients boost their investment performance while
reducing market exposure and portfolio volatility.

Chris is also the founder of TheGoldAndOilGuy.com, a financial education and
investment newsletter service. Chris is responsible for market research and
trade alerts for of its newsletter publication.

Through years of research, trading and helping thousands of individual investors
around the world. He designed an automated algorithmic trading system for the
S&P 500 index which solves his client's biggest problem related to investing
in the stock market: the ability to profit in both a rising and falling market.

AlgoTrades' automated trading systems allows
individuals to investing using either exchange traded funds or the ES mini
futures contracts. It is supported by many leading brokerage firms including:

He is the author of the popular book "Technical
Trading Mastery - 7 Steps To Win With Logic." He has also been featured
on the cover of AmalgaTrader Magazine, Futures Magazine, Gold-Eagle, Safe
Haven,The Street, Kitco, Financial Sense, Dick Davis Investment Digest and
dozens of other financial websites. His list of personal and professional
relationships approaches 25,000, people with whom he connects and shares
is market insight with out of his passion for trading.

Chris is a graduate of Seneca College where he specialized in business operations
management.

Chris enjoys boating, kiteboarding, mountain biking, fishing and has his ultralight
pilots license. He resides in the Toronto area with his wife Kristen and two
children.